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Are Digital Mobile Lenders the New Loan Sharks?

There are 14 million people blacklisted by Credit Reference Bureaus (CRBs) in Kenya according to the latest figures released by the CRBs, indicating a 45% jump between August 2020 and January 2021. This has been largely attributed to the proliferation of mobile app loans with a 2019 FinAccess report showing mobile bank loans and digital app loans with the second and the fourth highest default rate by loan type respectively. This has led to many people accusing digital app lenders of loan shark tendencies, deliberately lending to people who can’t afford to pay back due to the high interest rates, by use of alternative data such as MPESA transaction history and access to a borrower’s contacts which gives them leverage in nudging borrowers to repay loans in default.

One of the reasons that reinforces the claim that digital mobile lenders operate a debt-trap business model is that they loan a lot of money to the unbanked and underbanked.  This is shown in the significant growth in the number of borrowers who can access quick unsecured loans through their mobile phones easily with no previous credit repayment history. On the flipside, according to Internet World Stats (IWS), Kenya recorded the highest internet infiltration rate in Africa in the year 2020 with 87.2% of the country’s population having been connected to the internet. This presented a huge market to provide the unbanked and underbanked with financial services through the internet, from providing loans and financial literacy through the new pervasive medium, a demographic that had largely been neglected by the formal banking system.

Digital app lenders are also accused of operating with opaque lending practices that does not foster transparency before lending to borrowers. This is reflected in the punitive late payment fees that borrowers are saddled with. These fees end up crippling the financial health of a borrower leaving them in a negative-pay cycle, borrowing to repay loans due. Digital lenders when pressed on this issue, they point out to their terms of service that every borrower must agree to before they access the financial services offered. Hence from their assertion, it is the prerogative of the prospective borrower to assess the terms of the service before agreeing and then decrying when they are enforced.

To rebut these and other claims made against them, digital lenders posit that they don’t just loan to borrowers with debt distress as they invest in technology that utilizes alternative data provided by the prospective borrower to paint a borrower’s ability to pay a loan and the limit determined by the credit scoring engines that heavily rely on data science and machine learning. This enables digital mobile lenders to provide a service that was previously not available to the unbanked and underbanked, hence democratization of finance.

Last year the Central Bank of Kenya (CBK) revoked the approval of digital lenders to share their data with CRBs and exempted those borrowing less than Ksh 1,000 to try and tame the runaway defaulting, and with members of parliament clearing a Bill that seeks to regulate mobile loan rates, this paves the way for a regulatory framework for digital mobile lenders and a wider adoption of financial services by the population to take advantage of the fourth industrial revolution without stifling innovation.

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